The Great Fixed-Rate Mortgage Rip-Off

Despite the base rate of interest being at an all time low, a recent report has shown that banks are scooping record profits from keeping their fixed-rate mortgage deals at artificially high levels. Financial information service, Moneyfacts, say that banks are enjoying their highest profit margins on this type of loan, since 1988. The average homeowner with a fixed-rate mortgage of £150,000 could be paying up to an extra £150 per month. That’s works out at around £3,756 over the life of a typical two-year deal.

This report comes days after Britain’s five biggest banks revealed a total profit of £15bn for the first half of the year. What is particularly hard for homeowners to bear, is the fact that two of the biggest mortgage lenders, Lloyds Banking Group and Royal Bank of Scotland, had to be bailed out by the Government during the financial crisis – making them part-owned by the taxpayer. Eddy Weatherill, from the Independent Banking Advisory Service basically summed up what everyone else was thinking when he said: “Banks are basically lining their pockets as quickly as they can.”

In June, 50% of all mortgages taken out, were fixed-rate loans, as borrowers were attracted by the idea of unchanging monthly payments. The average two-year fixed-currently carries around 4.55% interest to the customer. The ‘swap-rate’, which is the cost to the bank of raising the money, is around 1.26%. This means that the bank’s margin is around 3.29% - which is a record high. Two years ago, thanks to high swap-rates, that margin was more like 1.28% - so the banks’ profits on fixed rate mortgages have virtually trebled. Although interest rates are at a seven-year low on this type of mortgage, the bank is clearly not passing on the whole story to the customer.

Michelle Slade of Moneyfacts said: “Borrowers will be angered that they continue to pay the price for mistakes made by lenders, particularly those who have accepted Government funding.” Five million homeowners – about half of the home loan market – have fixed-rate mortgages. Certainly, many of us will be wondering why the banks are already making such obscene profits, when they only recently needed taxpayers to bail them out. With the cost of living rising and incomes falling, it is deeply unpalatable that the high street banks are making a fast buck out of many hard-pressed homeowners.